A S&P 500 index fund holds shares in 500 large U.S. companies and moves up or down with their average value

A S&P 500 index fund is a fund that owns a piece of each of the 500 largest publicly traded companies in the United States. When you buy shares in the fund, you own a tiny slice of all 500 companies at once. The fund's value rises when those companies' stock prices rise on average, and falls when they fall. You do not pick which companies are in the fund — the fund straightforward mirrors the list that Standard & Poor's, a financial data company, publishes and updates.

The 500 companies in the index change over time. Standard & Poor's removes a company if it no longer meets size requirements or if it merges with another company, and adds a new one to keep the list at 500. The fund manager automatically buys or sells shares to match these changes. You do not have to do anything when this happens.

Key Takeaways

  • A S&P 500 index fund owns shares in 500 large U.S. companies, so you own a small piece of each one when you buy the fund.
  • The fund's value moves with the average price of those 500 stocks, so you gain or lose money as their prices change.
  • You can buy S&P 500 index funds through a brokerage account, a 401(k), or an IRA, depending on where you keep your money.
  • The fund charges a fee each year, usually between 0.03% and 0.20% of the money you have in it, though this varies by fund provider.
  • Because the fund holds 500 companies, your risk is spread across many businesses rather than concentrated in one or a few.

Which companies are actually in the S&P 500

The 500 companies in the index are the largest by market value — the total worth of all their stock combined. This means the list includes household names like Apple, Microsoft, Amazon, Nvidia, and Tesla, but also thousands of smaller well-known companies you may not think about daily, such as Chipotle, Costco, Starbucks, and Procter & Gamble.

The index spans many industries: technology, healthcare, finance, energy, retail, manufacturing, and others. Because the fund holds companies across so many sectors, a downturn in one industry does not wipe out the whole fund. If oil prices fall and energy stocks drop, the fund still holds strong healthcare and technology companies.

Standard & Poor's publishes the full list of 500 companies on its website, and it updates the list whenever a company is added or removed. The list is public and free to see.

How the fund's value changes day to day

The fund's price moves whenever the stock market opens. Each of the 500 companies' stock price changes based on what buyers and sellers think the company is worth. The S&P 500 index fund's value is the average of all 500 stock prices weighted by company size — meaning larger companies have more influence on the fund's movement than smaller ones.

If Microsoft's stock rises 2% and Apple's stock rises 1%, and both are large parts of the index, the fund might rise roughly 1.5% (the exact number depends on the weights of all 500 companies). If a smaller company in the index rises 10%, it has less effect on the overall fund because it represents a smaller piece of the total.

You can check the fund's value any trading day during market hours. Most brokerages show the price in real time or with a 15-minute delay.

Fees and costs you pay each year

Every S&P 500 index fund charges an annual fee called an expense ratio, which is a percentage of the money you have in the fund. This fee pays for the fund manager to track the index, buy and sell shares when companies are added or removed, and cover administrative costs.

Expense ratios for S&P 500 index funds range from about 0.03% to 0.20% per year, depending on the fund provider. A fund with a 0.05% expense ratio costs $5 per year for every $10,000 you have invested. A fund with a 0.20% expense ratio costs $20 per year on the same $10,000. The fee is deducted automatically from your account, so you do not pay it separately.

Different fund providers offer S&P 500 index funds with different expense ratios. Vanguard, Fidelity, and Schwab each offer their own versions, and the fees differ slightly. When comparing funds, the expense ratio is one of the main costs to look at.

Where you can buy S&P 500 index funds

You can buy S&P 500 index funds through several types of accounts. A brokerage account is a regular investment account you open with a company like Fidelity, Vanguard, or Schwab. You deposit money, choose which funds to buy, and can withdraw money whenever you want (though you may owe taxes on gains).

A 401(k) is a retirement account offered through your employer. Many 401(k) plans include S&P 500 index funds as one of the investment choices. Money you put in reduces your taxable income for the year, and you do not pay taxes on gains until you withdraw the money in retirement.

An IRA (Individual Retirement Account) is a retirement account you open on your own. Both traditional IRAs and Roth IRAs allow you to buy S&P 500 index funds. With a traditional IRA, contributions may reduce your taxes now, and you pay taxes on withdrawals later. With a Roth IRA, you pay taxes on contributions now, but withdrawals in retirement are tax-free.

The type of account you choose affects how much you can contribute each year and when you can withdraw money without penalty. The fund itself works the same way regardless of which account holds it.

How S&P 500 index funds compare to picking individual stocks

When you buy an S&P 500 index fund, you own 500 companies instead of betting on one or a few. If one company performs poorly, the other 499 cushion the loss. If you pick individual stocks and one company fails, that money is gone.

Index funds also require far less research. You do not have to read financial reports, follow earnings announcements, or decide when to buy and sell. The fund manager handles all of that. With individual stocks, you have to do the research yourself or pay someone to do it.

Index funds charge lower fees than actively managed funds, which employ managers to pick stocks they think will outperform the market. S&P 500 index funds straightforward track the index, so they cost less to run.

Frequently Asked Questions

Can I lose all my money in an S&P 500 index fund?

The fund's value can drop significantly during market downturns — it fell roughly 34% during the 2008 financial crisis and about 19% in 2022. However, it has never gone to zero because that would require all 500 large U.S. companies to fail simultaneously, which has not happened in modern history. Your money is at risk of loss, but the risk is spread across 500 businesses.

What happens to my fund if one of the 500 companies goes bankrupt?

When a company in the index fails, Standard & Poor's removes it and adds a new company to keep the list at 500. The fund automatically sells the bankrupt company's shares (usually at a loss) and buys shares in the replacement company. Your fund's value drops slightly because of the loss, but the other 499 companies continue to hold value.

Do I get dividends from an S&P 500 index fund?

Many of the 500 companies pay dividends to shareholders. The fund collects these dividends and either distributes them to you (usually once or four times per year) or reinvests them automatically to buy more shares of the fund. You can choose which option you prefer when you set up the fund.

Is an S&P 500 index fund the same as a total stock market index fund?

No. An S&P 500 fund holds 500 large companies. A total stock market index fund holds thousands of companies of all sizes — large, medium, and small. The S&P 500 fund is more concentrated in large companies, while a total market fund spreads your money across a wider range of businesses.

How often should I check my S&P 500 index fund's value?

You can check it as often as you want, but frequent checking often leads to emotional decisions during market swings. If you are investing for retirement decades away, checking once or twice a year is usually enough. If you are saving for a goal a few years away, checking quarterly may make sense.